2017 State of the Cities

Transcription

1 2017 State of the Cities Introduction The League of Minnesota Cities sent the fiscal conditions survey to chief appointed officials in all member cities late last year. Roughly 43 percent of officials responded. The fiscal conditions survey contains versions of questions used by the National League of Cities. This marks the 14th year that Minnesota cities have responded to the survey. The survey results overall suggest that things are fairly stable for cities right now. While the data does suggest that challenges for cities remain, especially in the areas of infrastructure funding and employee costs, the majority of city officials who responded said that their city was better able to meet needs in 2016 than in the previous year. This echoes the nationwide trend. The National League of Cities reported that 81 percent of city finance officers were optimistic about meeting their city s fiscal needs in Some context: Local government aid (LGA) remains stable. There were a handful of proposals in the 2016 legislative session to cut aid to certain cities, but none were passed into law. There is still no inflation adjustment in the LGA program. There are several proposals for additional funding or distribution changes to the LGA system in the 2017 legislative session. The Legislature still has not passed significant transportation funding. Further, aid that was available to small cities in 2015 was not distributed in Cities continue to feel pressure from things like mandates for clean drinking water and demand for broadband access, as well as the burden of significant infrastructure projects for water and sewer. There is also growing concern about the future of federal health care regulations. The most recent state budget forecast projects a surplus of more than $1.5 billion. State unemployment is 4 percent according to most recent data. Nationally, economic indicators are largely positive although there are steady concerns about the cost of health care. Ability to meet needs The share of Minnesota cities reporting they are better able to meet needs is 67 percent. This is the same proportion of cities that gave this response last year. It is higher than the share predicting improvement for 2016 (62 percent had predicted they would be better able to meet needs). The better able/less able measure is a relative comparison. City respondents do not share any financial

2 Page 2 data, but instead indicate whether things are generally improving over last year or are getting more challenging. A response of better able, therefore, does not necessarily suggest that a city s fiscal health is good. It may mean simply that meeting service needs and balancing the budget are easier than in the prior year. Looking at the chart reveals a very stable trend in the share saying better able. The share of cities expressing concern about their ability to meet financial needs has seen a slight but steady uptick in the portion. The share of cities with concern about the future grew to 34 percent for This is up slightly from last year s survey when 33 percent predicted a more difficult time for the year ahead. Issues creating stress for cities right now include: concerns about the ongoing stability of LGA and the lack of an inflation adjustment in the program; the uncertainty surrounding whether the Legislature will be able to pass transportation funding; rising costs of living and price inflation; and water quality standards. Ability of Minnesota cities to meet financial needs, 2015, 2016 and 2017 (predicted) Better able to meet needs in 2015 Less able to meet needs in 2015 Better able to meet needs in 2016 Less able to meet needs in 2016 Prediction: better able to meet needs in 2017 Prediction: less able to meet needs in 2017 Number of cities Share of cities 67% 30% 67% 33% 66% 34% The chart below shows the breakdown of cities by the better able or less able response since LMC started asking this question: o From 2003 to 2006, there was a significant decrease in the share of cities saying less able. This was in the wake of dramatic cuts to LGA, and cities slowly recovered. o Starting in 2007, the share of cities better able to meet needs began to fall and bottomed out at around 17 percent in Cities at that time were struggling with the effects of the great recession. o From that point, however, another steady increase began in the share of cities optimistic about meeting needs. Recently, the share of cities with a positive outlook has leveled off at 67 percent.

3 predict Page 3 100% Chart A: Ability of Minnesota cities to meet financial needs 80% 60% 40% 20% 0% % of cities better able to meet financial needs % of cities less able to meet financial needs Looking by size: small, medium, and large Large cities (those over 10,000 in population) were more likely to say better able in 2016 (89 percent) than cities overall. Small cities (those under 2,500) were less likely to say better able (59 percent) than cities overall. Small cities were also more likely to say less able than cities overall (40 percent versus about 33 percent). When looking to the future, these trends hold for the smallest and largest cities: about 60 percent of the smallest cities said better able. A positive outlook for 2017 among large cities is reported by a full 90 percent of cities in the group. For medium cities (between 2,500 and 10,000), however, the share saying better able in 2016 is almost ten percentage points lower than in It stays steady for the 2017 prediction. Share of cities better able to meet needs by size Better able in 2015 Better able in 2016 Better able in 2017 (prediction) Small cities (under 2,500) 57% 59% 59% Medium cities (2,500-10k) 82% 73% 73% Large cities (over 10k) 89% 89% 90%

4 Page 4 Looking by location: metro versus outstate cities Metro cities overall were more likely to say better able in 2016 (83 percent versus 63 percent). The difference between metro and Greater Minnesota cities widened over last year, when it was by 12 percentage points. Cities in the metro area were also more likely to say better able for next year (86 percent versus 62 percent). Revenue shortfalls City officials most frequently cited slight shortfalls (defined as less than 10 percent of expected revenues) in the areas of property tax (32 percent), fees/charges (25 percent) and state revenues (20 percent). Looking at just the share of cities with a significant shortfall (greater than 10 percent of expected revenues) shows that 8 percent of cities experienced these larger fee shortfalls and 6 percent of cities reported these larger state revenue shortfalls. There was a sharp uptick in the share of cities reporting shortfalls in state revenues, from 11 percent to 21 percent. It is likely that many cities were anticipating an increase in LGA but the Legislature failed to pass the tax bill containing that increase. From the comments offered by some respondents, it seems that the absence of LGA increases or inflation adjustments are seen as shortfalls. For example, one city official noted that the city saw a shortfall in state revenues due to LGA not being restored. Another wrote, LGA, our major funding source, remained about the same again for this year and next. This is very problematic for us. In addition, the transportation aid distributed to small cities in 2015 was not available in The portion of cities identifying shortfalls in revenues from the federal government nearly doubled. Cuts to federal grants and uncertainty about the future of the Affordable Care Act may have contributed to this trend. Percentage of Minnesota cities reporting revenue shortfalls* Property taxes Fees and charges Lodging and restaurant taxes State revenues Federal revenues % 17% 5% 82% 12% % 24% 3% 55% 8% % 25% 4% 39% 12% % 33% 4% 31% 13% % 36% 5% 35% 15% % 41% 8% 41% 14% % 57% 12% 61% 16% % 51% 11% 73% 22% % 43% 7% 65% 17% % 39% 6% 35% 13%

5 Page % 34% 5% 18% 9% % 28% 4% 11% 6% % 27% 5% 11% 6% % 26% 5% 21% 11% Combines cities identifying shortfalls of less than 10% of expected and greater than 10% of expected Looking at revenue shortfalls by city size Cities of different sizes reported property tax shortfalls at very similar rates. The smallest cities (under 2,500 population) were slightly more likely to report shortfalls in property revenues (35 percent versus 32 percent overall). This contrasts with last year, when large cities (over 10,000 in population) were much less likely to report slight property tax shortfalls only 15 percent reported shortfalls of less than 10 percent of expected revenues, compared to 30 percent of cities overall. This year, 26 percent of the largest cities identified a property tax revenue shortfall, closer to the rate for cities as a group. Small cities were also more likely to report shortfalls in fees/charges. Almost 1 in 3 of these cities experienced fee revenues coming in less than expectations, compared to 26 percent for cities overall. Looking at shortfalls in state revenues, only one city over 10,000 population experienced this revenue challenge. A full quarter of the smallest cities saw shortfalls in state revenues and 21 percent of medium cities did. Looking at revenue shortfalls by city location While 32 percent of cities overall reported at least a slight shortfall in property taxes, this is less common among metro cities. Roughly 26 percent of metro cities reported this. Similarly, metro cities were less likely to experience a shortfall in fee/charges revenue (14 percent versus 27 percent for outstate cities). These trends are like those observed last year. Metro and outstate cities reported shortfalls in state revenues at different rates 9 percent and 23 percent, respectively. Budget pressures The survey gives insight into the degree that different budget factors are having an impact on Minnesota city budgets. Some budget factors, when they are present, create stress. Inflation and rising cost of living are two examples of this. Other factors, such as new developments needing services like water and sewer, put pressure on city budgets but also bring benefits. The table below shows the findings related to several different budget factors.

6 Page 6 Share of Minnesota cities reporting changes in select budget factors Value of city tax base Health of local economy Service needs of new development State environmental mandates Public safety needs Infrastructure needs Prices, inflation, cost of living Increase Increase Increase Increase Increase Increase Increase Number of cities Share of cities 60% 27% 37% 34% 52% 62% 74% Decrease Decrease Decrease Decrease Decrease Decrease Decrease Number of cities Share of cities 10% 18% 2%.4%.4% 1%.4% A look at trends in budget factors that likely contribute to fiscal health A full 60 percent of cities overall said their tax base increased in value. This is the fourth year for an increase in this portion. Only 10 percent said it decreased compared to last year. Almost all metro cities (92 percent) reported their tax bases grew over the previous year. This share was much lower among greater Minnesota cities (55 percent). Just shy of a third of cities (27 percent) said the local economy s health had increased over last year. This is a slight dip from last year s figure of 34 percent. Budget factors that create fiscal stress for cities Nearly 40 percent of cities reported increased service needs of new development. Clearly this is a budget factor that can bring about positive and negative impacts on a city s overall fiscal situation. Last year, 30 percent of cities had experienced an increase in service needs stemming from new development in the community. For 2016, metro cities were twice as likely to feel pressure from increasing service needs of new development than outstate cities. Public safety needs are a clear issue for Minnesota cities. Just over half of all cities indicated that public safety needs had increased, a small increase over last year. Only one city out of all survey respondents said that this need decreased. Cities over 10,000 were more likely to experience growing public safety needs than cities overall (87 percent versus 52 percent). Small cities were less likely, as only 40 percent of them reported this budget pressure. The difference between metro cities and outstate cities is stark here. Eighty-one percent of metro cities saw increasing public safety needs, while 47 percent of their outstate counterparts did so. About two-thirds of cities report increased infrastructure needs. The share of cities seeing an increase in infrastructure needs shrank slightly from last year s survey. Comments offered by respondents highlight the extensive water and sewer projects that cities are facing. Some cities describe street projects, too. One respondent noted, The city is facing major street repairs. We do not have the reserve funds as we did 20 years ago to pay for the roads, nor do we have a growing population to support the expense

7 Page 7 large projects are out of reach for us. The largest cities and medium (2,500-10,000) cities more often reported rising infrastructure need (97 percent and 88 percent, respectively). Just like individuals, cities face inflation in the cost of goods and supplies they need to buy. Nearly 75 percent of cities as a group reported higher prices and/or cost of living. This up slightly from last year. One respondent offered this comment: We are doing a water/sewer infrastructure project and we are significantly short of funds. Waiting on the bonding bill, however, prices have gone up dramatically since this spring s bids. The largest cities responding (over 10,000 population) were almost 20 percentage points more likely to report pressure from rising prices. Employee-related cost pressures Several years ago, the League added questions focused on employee-related costs in order to understand the ways that cities handled problems of the great recession. Anecdotal information at the time suggested that cities were making changes to wages and benefits. Below are the findings from this year s survey in these areas. Percentage of cities reporting changes in employee-related budget factors Cost of employee pensions Cost of employee health benefits Employee wages and salaries Increase Increase Increase Number of cities Share of cities 33% 56% 81% Decrease Decrease Decrease Number of cities Share of cities 1% 4% 1% Overall, a third of cities reported growth in the cost of employee pensions. Looking at just the medium cities, that portion was much higher at 56 percent. A full 81 percent of medium cities and nearly 70 percent of the largest cities saw employee health benefit costs go up. Nearly twothirds of metro cities experienced rising employee benefit costs. Just over half of greater Minnesota cities saw benefit costs rise. Overall, 81 percent of cities reported growth in wages and salaries. Nearly every medium city that responded to the survey saw increases in wages and salaries. The largest cities were least likely to report this budget pressure (63 percent). Looking by geography revealed that more than 75 percent of both metro and Greater Minnesota cities experienced growing wages and salaries for city employees.

8 Page 8 Budget actions Cities in Minnesota take a variety of actions to deal with fiscal stresses, service demands, and changes in state law. Respondents to the fiscal conditions survey shared the specific strategies their city has used and at what level they are using each of them. Budget balancing actions taken by Minnesota cities, Increase in taxes Increase in fees/charges Increase in growth rate of spending Increase in infrastructure spending Increase in public safety spending Increase in number/scope of interlocal agreements FY % 36% 61% 54% 54% 12% FY % 36% 44% 40% 43% 13% FY % 35% 26% 35% 31% 13% FY % 37% 33% 38% 35% 14% FY % 33% 32% 41% 38% 17% FY % 30% 40% 48% 44% 15% FY % 29% 45% 52% 51% 14% FY % 30% 52% 57% 52% 8% FY % 27% 50% 63% 58% 12% FY % 26% 51% 53% 51% 9% The budget actions used by the largest share of cities were to increase property taxes, increase the growth rate of spending, increase in infrastructure spending, and increase in public safety spending. One city offered that it used a levy increase for 2017 at 4.99 percent to fund five new full-time positions, four of which are public safety positions. Most budget actions were used at very similar rates to last year, except for increases in infrastructure spending (down 10 percentage points) and increases in public safety spending (down seven percentage points). Small cities were less likely to employ property tax increases than cities overall (54 percent versus 70 percent). Infrastructure spending grew in 53 percent of communities. Cities over 10,000 responding to the survey were more likely to grow infrastructure spending (71 percent). Infrastructure projects described in city official comments centered largely on water and sewer system replacements or improvements. One respondent reported that the water plant is in dire need of replacement and will be well over a million to do so. Fifty-one percent of cities spent more on public safety. Small cities were least likely to report this budget action, but this likely reflects the fact that smaller cities are more likely to rely on county public safety services.

9 Page 9 Share of cities undertaking human resource-related strategies, Reduced workforce 26% 25% 20% 16% 8% 7% 5% 7% Cut or maintained wage levels 65% 63% 48% 39% 28% 24% 28% 29% Reduced employee benefits 11% 9% 8% 6% 4% 5% 5% 4% The table above shows the findings on the use of human resource-related strategies. The fiscal conditions survey project started tracking these after the great recession. Rates of cities using these different HR actions remain very steady. About 70 percent of respondents said their cities increased wage levels for employees. Most of these made slight increases in wages for employees. These findings contrast with past trends. Data from the last few years suggests that cities are doing some catch-up to retain employees, attract new applicants to fill vacancies, and/or to compete with wages offered in the private market. Other notable highlights from the survey: Just over 25 percent of all cities increased the rates of their existing fees and/or implemented new fees. Metro cities were about twice as likely to raise fees or implement new fees than outstate cities. Very few cities made cuts to or eliminated services in Only five cities reported making service cuts. Share of cities increasing cuts to service levels, FY2007 6% FY % FY % FY % FY % FY2012 9% FY2013 4% FY2014 4% FY2015 3% FY2016 2%